Expense throughout time gross profit percentage sales

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expense throughout time Gross profit percentage – sales, less COGS, divided by net sales - (Sales – COGS) (Net Sales) Net Income Percentage – (return on sales) measures the percentage of sales left after subtracting COGS, all operating expenses, interest & taxes - (net income) (net sales) Example: o What the percentages will tell you (if profitability is dropping) Sales % increase, but net income % drops further Gross profit percentage decreases from year 1 year 2 Net income percentage decreases from year 1 year 2 o Profitable, but trend is not good Past performance may not be sustained in the future Question 3: Where Is the Business Getting Its Money and Can It Pay Its Debt Obligations?
o Financing decision – how a business acquires money, debt or equity, to acquire assets Debt / equity = both have a cost o Reviewing Liabilities Amount, types, and changes in debt a business owes Notes interest rate charged on debt, when debt is due, features of debt (covenants) Debt Covenants – conditions, stated in the debt contract, that specify the requirements agreed to by the lender and borrower - Ex: Collateral - Collateral – assets pledged by a borrower to guarantee the payment of a liability o Reviewing Stockholders’ Equity Amount, types, and changes in stockholders’ equity Notes what is happening with stockholders’ equity - Common stock, preferred stock, retained earnings, dividends Statement of retained earnings - How retained earnings changed from BEG to END of period o Goal = obtain money at lowest possible cost Can’t have too much debt - But debt is cheaper than stockholders’ equity Vertical analysis - How much debt a business has relative to stockholders’ equity Horizontal analysis - How a business is changing the blend of liabilities / stockholders’ equity over time o Ratios
Debt ratio – measures a business’s ability to pay liabilities - (Total Liabilities) (Total Assets) Interest coverage ratio – measures the number of times that operating income can cover interest expense (times interest earned ratio) - Operating Income (EBIT) Interest Expense Example: o Given: Debt Ratio = 47.1% Interest Coverage Ratio = 2.5 o Can the business pay its debt? Yes Strong operating cash flow Sufficient operating income to cover interest expense o Company is well financed Risk of defaulting on debts = low It is paying its debts Question 4: How Is the Business Investing Its Money and Is It Using Its Assets Efficiently? o Investing Decision – how a business uses money to acquire money Goal = to create operating income that adequately rewards lenders / owners for use of their money o Analyzing Assets Types of assets invested into How asset investments change over time Balance sheet amount, types of, changes in assets a business owns Notes insights (ex: depreciation assumptions) o How Assets Produce Income Productivity of each asset

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